REPRICING EXECUTIVE STOCK-OPTIONS IN A DOWN MARKET

This paper analyzes the repricing of employee stock options after a market-wide crash. The model identifies sufficient conditions for renegotiation to be optimal and for optimal compensation to be a fixed salary plus stock options. Empirical results support the renegotiation prediction. Stock option grants increase in both number and value after the 1987 crash. Firms with underwater options grant significantly more options post-crash than pre-crash, whereas firms with in-the-money options don't. Furthermore, firms suffering the largest impact from the crash are the most likely to increase grants after the crash.